Push for tough penalties by Chopra, Slaughter pays off in LendEDU case
14 Feb 2019 12:00 am by Kirk Victor
Veteran practitioners were surprised by news of the Federal Trade Commission securing monetary relief against personal finance website LendEDU, which engaged in a pay-to-play scheme.
They contend the relentless push for such tough relief by Democratic commissioners — Rohit Chopra and Rebecca Slaughter — has had an impact.
In a detailed administrative complaint, the commission said the Delaware-based company misled consumers into believing its site rankings of financial products were based on objective data. But the star ratings were given to products after LendEDU received payments.
The commission voted unanimously to accept a consent agreement to prohibit LendEDU and its officers from making such misrepresentations and to require the company to pay $350,000.
“They got money in this case and that is a big deal,” Phyllis Marcus of Hunton Andrews Kurth said in an interview. “They pled it as an administrative action which they tend to do with their online review cases and false endorsement cases. Nonetheless, they got money from the company and their principals … for redress.”
The FTC also said LendEDU misrepresented consumer reviews about its website as based on experiences of impartial consumers. In fact, many of those plaudits were written by LendEDU employees, their friends or family members or others associated with the firm.
“I was surprised there was money involved for consumer redress in a case about paid placement and fake reviews,” Amy Ralph Mudge of BakerHostetler e-mailed. “That is the first time we have seen that. Certainly the conduct as alleged violates Section 5 [of the FTC Act] but connecting that conduct to any consumer harm seems almost impossible.”
“But the Democrats [Chopra and Slaughter] have been clear they want to see monetary relief in all cases and want to see officers named in cases with individual liability,” Mudge added. “They have definitely moved the needle on those two points.”
Marcus and Mudge contrasted the commission’s unanimous vote in LendEDU with its 3-2 split along party lines in a case last year against Sunday Riley Skincare, a cosmetics firm whose employees posted fake product reviews on a well-known retail site (see FTCWatch, No. 972, Nov. 11, 2019).
In that case, the two Democratic commissioners rebuked the majority for imposing what they saw as a slap on the wrist for clear violations of the law.
The commission’s settlement with the company and its CEO, Sunday Riley, bars them from engaging in similar conduct in the future. They must also disclose, clearly and conspicuously, connections between endorsers and the product.
“That monetary relief can be difficult to calculate should not deter the FTC from seeking it,” Chopra wrote in a statement joined by Slaughter. “When the agency’s estimates are uncertain, the Commission sometimes demands no monetary relief whatsoever, which leads to under-deterrence of blatant fraud and dishonesty. This needs to change.”
“Dishonest firms may come to conclude that posting fake reviews is a viable strategy given the proposed outcome here,” the statement adds.
Pointing to those tough dissents, Marcus said, “there was no way that they weren’t going to extract money in this [LendEDU] case.”
“I don’t think this case could have come out any other way given the messaging and warnings that were issued by the minority commissioners in Sunday Riley,” she said. “All of the articulation by the minority commissioners had an impact. It is better to have a 5-0 vote than not, and that is what they got.”
Mudge agreed. “Chopra and Slaughter go back and forth on who is going to write the angry dissent,” she said in an interview. “But their themes are still the same. We have got to get money and we have to have individual liability for officers.”
“They did not back down,” Mudge said. “They keep pushing [penalties]. We are beginning to see them being implemented in some of these cases, and this is a perfect example.”
But Andrew Smith, director of the Bureau of Consumer Protection, sees the two cases as different when it comes to securing relief.
“I don’t think it is surprising that this [LendEDU] is a money case, nor is it surprising to me that Sunday Riley is not a money case,” Smith said in an interview. “We closely examine the facts in such cases and generally can’t get money unless we can identify concrete consumer losses that result from the deceptive practice or we can demonstrate the company made money from its law violations.”
“In Sunday Riley, obviously, were there a basis to get money, that would have been great, and we would have pursued it,” he added. “But we don’t have a civil penalty because we don’t have a violation of a rule or a violation of an existing order. If she does it again, we would have a basis for civil penalties. I don’t think that we had a basis for equitable monetary relief. In that light, an administrative order imposing liability on an individual CEO and substantial conduct relief is a pretty strong remedy.”
“With LendEDU, we know clearly that the company made money by providing these rankings and earning payments from the various advertisers,” he continued. “That was its business model. Its revenue was a result of the deceptive practice. That is the basis for the $350,000.”
“Compare it to a case like Sunday Riley where there are fake reviews, which are obviously bad, and where we took particularly strong action. But in order to get money there, you’d have to tie earnings of Sunday Riley to the fake reviews and that can be a really hard thing to do. You can’t even show necessarily that consumers saw the fake reviews, much less show the causal link.”
“We are naming the individual, Ms. Riley herself. We have not always done that in these types of administrative actions,” Smith said. “I think that’s really quite significant.”
“Fake and manipulated user reviews are a serious problem and they harm consumers and they harm honest competitors,” Smith noted.
“The takeaway from the Sunday Riley case shouldn’t be that we are not serious about fake reviews,” Smith insisted. “I don’t think anyone should doubt our resolve on that issue. It’s a question of whether or not we have a money remedy available to us.”
“The same day that we released Sunday Riley, we also released the Devumi case — which was the fellow who sold the fake followers. In that case we got money relief. And in the LendEDU case, we got money relief. So where we have a theory for money, we will pursue money.”
One thing is certain: The FTC will be bringing more online review and ratings cases down the road, as Slaughter signaled in a concurring statement in LendEDU (see story by Kirk Victor: “Smith doesn’t see grave threat from court setbacks”).
Calling the complaint “powerful,” Slaughter added the case addressed “a cutting-edge market practice that I fear is becoming increasingly common online: purportedly neutral rankings and recommendations that actually reflect paid product placement.”
“Companies that engage in pay-to-play rankings and ratings should take heed: This conduct robs consumers of vital information, pollutes our online marketplaces, and violates the law, which will result in serious consequences,” she said.
18 Jan 2021 12:00 am by Curtis EichelbergerThe small number of African American attorneys practicing antitrust, both in government and the private sector, hasn’t gone unnoticed.
11 Jan 2021 8:00 am by Matthew NewmanProposals for EU powers to fine “very large” platforms up to 6% of their annual revenue for violating rules on hate speech and the sale of illegal goods will spark a debate.
24 Dec 2020 12:00 am by Mike SwiftThe executive committee of state attorneys general heading the antitrust investigation into Google convened for another regular planning call.